Review

• Ranhill Utilities Berhad’s (RANHILL) 4QFY23 results came in below expectations. Stripping off exceptional items including matching grant from the government amounting to RM68.5mn (80% effective stake of RM85.7mn received), core loss was RM20.8mn. The earnings miss was mainly attributed to higher-than-expected non-revenue water (NRW) maintenance costs.

• Recap that under the National NRW Reduction programme, state water operator that manages to achieve the NRW target in the year will be eligible for a matching grant for part of the cost incurred (50% or 75% depending on target achieved). We understand that RANHILL managed to achieve NRW level of 25% in FY23, below the threshold to be entitled to the matching grant of 50% of the costs incurred for undertaking NRW improvement works.

• QoQ: RANHILL’s PATMI more than doubled QoQ in 4QFY23 due to government grants mentioned above and higher contribution from Ranhill Worley from greater progress of newly secured projects. Nonetheless, the group registered a core loss of RM50.7mn in 4QFY23 compared with a core profit of RM7.7mn in 3QFY23, which we believe is due to higher maintenance costs for Ranhill SAJ.

• YoY: 4QFY23 PATMI plunged 65.8% YoY due to lower grant received (4QFY23: RM85.7mn; 4QFY22: RM142.3mn) and higher NRW maintenance costs.

• YTD: FY23 PATMI dipped 39.2% YoY on the back of higher electricity costs (RM24.8mn), higher NRW maintenance costs (RM43.2mn) and lower recognition of government grant compared to the year prior.

Impact

• We increase the cost assumptions for Ranhill SAJ for FY24 and FY25, hence trimming our FY24-FY25 earnings forecasts by 1.5%-5.7%. We introduce FY26 earnings forecasts of RM54.0mn.

Outlook

• Environment Segment: The domestic water tariff for Johor was increased by 29 cents per m3 (+22.9%) for the first 35m3 consumption per month, effective 1 Feb 2024. We estimate that the hike will improve earnings by c.3%-5% in FY24. Meanwhile, the new tariff setting mechanism comes with a three-year review cycle, which we believe is to facilitate price adjustments every 3 years in line with inflation.

• Energy Segment: RANHILL achieved commercial operation date (COD) on 7 Feb 2024, later than the scheduled COD on 31 Dec 2023 under the power purchase agreement (PPA). The set back is likely due to delay during testing and commissioning at the solar farm. A delay penalty of RM5k per MW capacity per day is applicable until the COD. For RANHILL, the delay penalty amounts to a staggering RM9.5mn. Fortunately, RANHILL has arrangements with the EPCC contractor whereby the contractor will bear the penalty, if incurred.

• Engineering Services Segment: As oil and gas companies face increasing demand to decarbonise their operations, RANHILL’s subsidiary Ranhill Worley is the frontrunner to secure more engineering design contracts for carbon capture and storage projects.

Valuation

• We roll forward our base year and arrive at a lower TP of RM1.06/share (previous RM1.07/share) based on SOP valuation. Maintain Sell recommendation as we believe RANHILL’s share price has moved ahead of its fundamentals.

Source: TA Research - 1 Mar 2024